ASX Code: SHM
Security price: $1.17
Industry: Wholesaling
CY17 forecast distribution: 10.0 cents per share
Shriro is a highly profitable, conservatively geared electronics and appliances wholesaler with an 8.5% fully franked yield trading at a forward P/E of 8.6 times. Such a description begs the question: what’s the catch? First and foremost, Shriro has unremarkable growth prospects. Though its consumer products range – centred on Casio calculators and watches – is growing strongly, its kitchen appliances range is struggling. To ignite growth in appliances, Shriro has partnered with well-known chefs, Neil Perry and Heston Blumenthal to create a range of premium stoves, ovens and barbecues. Such initiatives are still in their infancy and we remain conservative on their contribution to the business’ growth. At present, we believe Shriro can grow earnings per share in the order of 5% per annum over the medium term.
As a small cap without the prospect of double digit growth, Shriro has remained largely neglected by the broader market. It is thinly covered, and a lack of liquidity has prevented substantial institutional investment. Making matters worse, Shriro’s management recently (and somewhat haphazardly) announced their intention to reduce their ownership in the business. Many investors took this as a red flag, and the share price plummeted. As further dialogue with management ensued, and the sinister aura surrounding the sell-down dissipated, the share price subsequently recovered, and climbed above the IPO price for the first time since listing.
Even so, Shriro still appears to offer compelling value at current prices. Valid concerns remain around the leverage of its kitchen appliances division to the Australian residential building and housing cycle but any impact from reduced activity is likely to affect only a small portion (~10-12%) of earnings. Meanwhile, Shriro will continue to create value in this division in the same ways it has throughout the history of its business – through innovation, collaboration and brand augmentation. In its consumer product range, its central partnership with Casio, spanning 38 years, is underpinning a successful and steadily growing portfolio of brands.
With Shriro exploring new avenues of growth through both its own and third party brands, it continues to be well supported by a robust balance sheet and strong cash flows. Average cash conversion of ~110% of reported profits have facilitated conservative gearing at 0.4 times (net debt/EBITDA). This leaves Shriro with an enviable degree of growth funding flexibility, whether it be organically or through acquisitions. Moreover, it allows the business to maintain an attractive payout ratio of around 70% which, at current prices, amounts to an 8.5% yield over the next 12 months. No doubt, this is not a defensive yield in the same vein as more established large caps given Shriro’s size, liquidity and cyclical earnings. Yet, at current prices, many of the risks associated with the business appear to be fully reflected. Our 12-month forward valuation currently sits at $1.48, reflecting forecasts that are below consensus expectations.
Though Shriro is not a classic yield stock and is bereft of the defensive qualities so desired by the market in recent years, it nonetheless offers a very attractive fully franked dividend for investors willing to bear some additional capital risk.
Originally published in The Australian on Tuesday 27th September 2016.
Damen Kloeckner is ana analyst at Clime Asset Management.